U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended JUNE 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _________ to ___________
Commission file number: 000-23321
DIVERSIFIED SENIOR SERVICES, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
NORTH CAROLINA 56-1973923
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
915 WEST 4TH STREET, WINSTON-SALEM, NC 27101
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (336) 724-1000
--------------
Check whether the Registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days. Yes X No___
As of July 31, 1999, the Registrant had 3,301,400 shares of Common Stock, no par
value, outstanding.
Transitional Small Business Disclosure Format Yes___ No X
DIVERSIFIED SENIOR SERVICES, INC.
FORM 10-QSB
June 30, 1999
TABLE OF CONTENTS
Page
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Statements of Changes In Shareholders' Deficit 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II: OTHER INFORMATION
Item 2 Changes in Securities and Use of Proceeds 17
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURE PAGE 20
DIVERSIFIED SENIOR SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
1999 1998
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $259,632 $32,150
Investments held for development (Note 5) 125,731 819,074
Accounts receivable--trade 225,355 113,921
Prepaid expenses and other 196,803 90,858
--------- ---------
807,521 1,056,003
Furniture and equipment, net (Note 4) 82,527 90,201
Development costs 420,950 730,604
Development fees and costs due from affiliates (Note 3) 6,376,338 2,603,656
Accounts receivable--affiliates (Note 3) 504,254 489,669
Other assets 21,617 43,235
---------- ----------
$8,213,207 $5,013,368
========== ==========
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $169,528 $200,774
Commitments to affiliates with properties
under construction 379,862 38,945
Deferred salaries and bonuses 191,823 191,823
--------- ---------
741,213 431,542
--------- ---------
SHAREHOLDERS' EQUITY
Preferred stock, no par, authorized 100,000,000 shares;
179,886 issued and outstanding at June 30,
1999 and 178,386 at December 31, 1998 3,579,462 891,930
Common stock, no par, authorized 100,000,000 shares;
3,301,400 shares issued and outstanding at
June 30, 1999 and December 31, 1998 6,319,246 6,319,246
Unrealized (losses) gains on investments (Note 5) (38,721) 16,061
Deemed distribution (1,335,790) (1,335,790)
Accumulated deficit (1,052,203) (1,309,621)
7,471,994 4,581,826
----------- -----------
$8,213,207 $5,013,368
=========== ===========
DIVERSIFIED SENIOR SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
Income:
Management fees 189,443 203,747 378,601 407,279
Reimbursement income 435,694 365,555 804,001 667,273
Development fees 386,705 317,006 1,286,332 317,006
Home care fees 59,237 86,498 130,162 162,927
Other 140,563 367 157,964 1,939
--------- ------- --------- ---------
1,211,642 973,173 2,757,060 1,556,424
--------- ------- --------- ---------
Expenses:
Personnel related 873,063 732,897 1,690,681 1,403,078
Administrative and other 203,400 200,467 736,712 367,235
Depreciation and amortization 19,966 18,128 39,723 34,011
--------- ------- --------- ---------
1,096,429 951,492 2,467,116 1,804,324
--------- -------- --------- ---------
Operating income (loss) 115,213 21,681 289,944 (247,900)
Other income (expenses):
Interest and other income - 69,174 28,227 100,520
Interest and other expense (3,548) - (3,548) (5,678)
---------- -------- --------- ---------
Net income (loss) 111,665 90,855 314,623 (153,058)
Preferred stock dividends 57,205 - 57,205 -
-------- -------- --------- ----------
Net income (loss) available for $54,460 $90,855 $257,418 $(153,058)
common shareholders ======== ======== ========= ==========
Per share data:
Net income (loss) per common share - basic and diluted $ 0.02 $ 0.03 $ 0.08 $ (0.05)
========= ========= ========= =========
Weighted average shares outstanding - basic 3,301,400 3,300,000 3,301,400 3,192,265
========= ========= ========= =========
Weighted average shares outstanding - diluted 3,326,116 3,330,695 3,327,821 3,192,265
========= ========= ========= =========
DIVERSIFIED SENIOR SERVICES, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Six Months Ended June 30, 1999 and 1998
(Unaudited)
Unrealized
Preferred Common Preferred Common Gain on Deemed Accumulated
Shares Shares Stock Stock Investments Distribution Deficit Total
--------- --------- -------- -------- ------------ ------------ ----------- ------------
Balance, January 1, 1998 178,836 1,800,000 $891,930 $ 100 $- $(1,335,790) $(1,291,826) $(1,735,586)
Issuance of common stock - 1,500,000 - 6,314,986 - - - 6,314,986
Unrealized gain on investments - - - - 49,602 - - 49,602
Net loss for the six months
ended June 30, 1998 - - - - - - (153,058) (153,058)
-------- --------- -------- ---------- ------- ------------ ------------ ------------
Balance, June 30, 1998 178,836 3,300,000 $891,930 $6,315,086 $49,602 $(1,335,790) $(1,444,884) $ 4,475,944
======= ========= ======== ========== ======= ============ ============ ============
Balance, January 1, 1999 178,386 3,301,400 $891,930 $6,319,246 $16,061 $(1,335,790) $(1,309,621) $ 4,581,826
Issuance of preferred stock 1,500 - 2,687,532 - - - - 2,687,532
Unrealized loss on investments - - - - (54,782) - - (54,782)
Net income for the six months
ended June 30, 1999 - - - - - - 257,418 257,418
------- --------- ---------- ---------- --------- ------------ ----------- ----------
Balance, June 30, 1999 179,886 3,301,400 $3,579,462 $6,319,246 $(38,721) $(1,335,790) $(1,052,203) $7,471,994
======= ========= ========== ========== ========= ============ ============ ==========
DIVERSIFIED SENIOR SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
------------ ------------ ----------- ----------
Operating activities:
Net income (loss) $ 54,460 $ 90,855 $ 257,418 $ (153,058)
Adjustments to reconcile net income (loss) to net
cash used by operating activities:
Depreciation and amortization 19,966 18,128 39,723 34,011
Changes in operating assets and liabilities:
Accounts receivable (103,361) (18,251) (111,434) (36,844)
Accounts receivable, affiliates (28,467) - (48,900) -
Development fees receivable (386,705) (317,006) (957,766) (317,006)
Prepaid expenses (5,924) 53,994 (96,864) (21,303)
Accounts payable, trade (79,485) (61,574) (72,405) (35,221)
Accounts payable, affiliates 4,202 9,602 13,805 19,205
Interest payable - - - (33,070)
Deferred salaries and bonuses - (18,000) - (620,090)
------------ --------- ----------- -----------
Total adjustments (579,774) (333,107) (1,233,841) (1,010,318)
------------ --------- ----------- -----------
Net cash used by operating activities (525,314) (242,252) (976,423) (1,163,376)
------------ --------- ----------- -----------
Investing activities:
Investments held for development (64,363) 790,484 638,561 (2,739,159)
Purchase of furniture and equipment (3,463) (22,871) (10,431) (56,243)
Development costs paid (64,278) (257,530) (82,028) (424,202)
Advances to affiliate for properties in development (1,860,060) (104,878) (2,045,139) (104,878)
Other - (520) - (50,520)
----------- -------- ----------- -----------
Net cash provided (used) by investing activities (1,992,164) 404,685 (1,499,037) (3,375,002)
----------- -------- ----------- -----------
Financing activities:
Repayment of borrowings - - - (1,729,575)
Proceeds from (costs of) issuance of common stock, net - (59,415) - 6,442,650
Proceeds from issuance of preferred stock, net 2,687,532 - 2,687,532 -
Advances from affiliates, net of repayments 73,442 (41,988) 20,510 (74,967)
Other 2,400 - (5,100) -
---------- --------- ----------- ----------
Net cash provided (used) by financing activities 2,763,374 (101,403) 2,702,942 4,638,108
---------- --------- ----------- ----------
Net increase in cash 245,896 61,030 227,482 99,730
Cash and cash equivalents - beginning 13,736 116,856 32,150 78,156
---------- -------- ---------- ----------
Cash and cash equivalents - ending $ 259,632 $ 177,886 $ 259,632 $ 177,886
========== ========= ========== ==========
Cash payments for interest $ - $ - $ - $ 38,748
========== ========= ========== ==========
DIVERSIFIED SENIOR SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 1: SELECTED DISCLOSURES
The accompanying unaudited consolidated financial statements, which are for
interim periods, do not include all disclosures provided in the annual
consolidated financial statements. These unaudited consolidated financial
statements should be read in conjunction with the Company's 1998 Annual Report
filed with the Securities and Exchange Commission on Form 10-KSB.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (which are of a normal recurring nature)
necessary for a fair presentation of the financial statements. The results of
operations for the six months ended June 30, 1999 are not necessarily indicative
of the results to be expected for the year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reporting amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.
NOTE 2: ACCOUNTING POLICIES
RECLASSIFICATION
Certain items in the financial statements for 1998 have been reclassified to
conform to the format presented in these financial statements.
NOTE 3: RELATED PARTY TRANSACTIONS
The Company is developing seven properties for 60-unit assisted living
facilities and four 30-unit independent senior housing residences with services.
Five of the 60-unit and the four 30-unit projects are currently under
construction. The owner of the properties is Taylor House Enterprises, Limited
("THE"), the majority stockholder of the Company. THE intends to sell the
60-unit properties to a third party owner after permanent financing is
completed. At June 30, 1999 development fees of $2,422,111 and reimbursable
costs of $3,954,227 are due to the Company. The Company is the guarantor on the
construction loans for the properties currently under construction. The amount
of the loans outstanding at June 30, 1999 was $4,880,162. The total commitment
for the properties currently under construction is $8,800,000.
DIVERSIFIED SENIOR SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 3: RELATED PARTY TRANSACTIONS (continued)
From time to time, the Company advances or borrows funds from THE or other
related entities. The following schedule summarizes the related party activities
for the six months ended June 30, 1999 and 1998.
Due from Due (to) from
Affiliated the and
Partnerships Subsidiaries Total
------------ -------------- ----------
Amounts due (to) from affiliates at January 1, 1998: $ 233,616 $ 76,791 $ 310,407
Computer equipment lease payment due to THE - (3,005) (3,005)
Rent due to THE (16,200) (16,200)
Development fees and costs due from properties
currently held by THE 421,883 421,883
Repayments to THE - 277,242 277,242
Advances from THE - (202,274) (202,274)
----------- ----------- ------------
Balance, June 30, 1998 $ 233,616 $ 554,437 $ 788,053
=========== =========== ===========
Amounts due from affiliates at January 1, 1999: $ 233,616 $2,859,709 $ 3,093,325
Computer equipment lease payment due to THE - (3,005) (3,005)
Rent due to THE - (10,800) (10,800)
Development fees and costs due from properties
currently held by THE - 3,772,682 3,772,682
Advances from THE (100,000) (100,000)
Advances due from affiliate - 128,390 128,390
---------- ----------- -------------
Balance, June 30, 1999 $ 233,616 $6,646,976 $ 6,880,592
=========== =========== =============
There was no interest income received from related parties during the six months
ended June 30, 1999 and 1998. The amounts due from affiliated partnerships are
collectible, but will not be realized until such time as certain partnerships
terminate.
The Company earned income from a subsidiary of THE, which is owned by officers
of the Company. The Company managed partnerships, whose general partner is the
chief executive officer and a beneficial shareholder of the Company, for the six
months ended June 30, 1999 and 1998 as follows:
1999 1998
---- ----
Management fees $ 160,036 $ 145,878
Reimbursement fees 367,829 270,403
Home care fees 6,240 6,240
----------- -----------
$ 534,105 $ 422,521
=========== ===========
At June 30, 1999, $31,303 of such fees are included in trade accounts receivable
and $66,283 is included in accounts receivable-affiliates.
DIVERSIFIED SENIOR SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 4: FURNITURE AND EQUIPMENT
The Company has furniture and equipment as follows:
June 30, December 31,
1999 1998
------------ -------------
Computer equipment $ 173,988 $ 163,557
Office furniture 52,005 52,005
----------- -----------
225,993 215,562
Less accumulated depreciation (143,466) (125,361)
------------ -----------
$ 82,527 $ 90,201
=========== ===========
Depreciation expense for the six months ended June 30, 1999 and 1998 was $18,105
and $22,956.
NOTE 5: INVESTMENTS HELD FOR DEVELOPMENT
The Company's investments held for development are invested in government and
corporate bond mutual funds and are held for development and construction of
assisted living and independent living facilities. These investments are
classified as available for sale and, accordingly, unrealized losses of $38,721
at June 30, 1999 have been recorded in equity. The carrying value of the funds
were based on current market prices at the statement date. Proceeds from sales
of the company's investments for the six months ended June 30, 1999 were
$2,062,410, resulting in gains of $34,277 and realized losses of $46,303. These
gains and losses are reflected in other income in the financial statements.
NOTE 6: ISSUANCE OF PREFERRED STOCK
On May 3, 1999, the Company issued 1,500 shares of 12% Series B Cumulative
Convertible Preferred Stock with no par value per share and a stated value of
$2,000 per share. The following gives the effect of the offering.
Gross proceeds (1,500 shares at $2,000 per share) $ 3,000,000
Offering expenses 312,468
-------------
Net proceeds from the offering $ 2,687,532
=============
The Company has preferred stock as follows:
June 30, 1999 December 31, 1998
Shares Amount Shares Amount
Series A 178,386 $ 891,930 178,386 $ 891,930
Series B 1,500 2,687,532 - -
------- ----------- ------- ----------
179,886 $ 3,579,462 178,386 $ 891,930
======= =========== ======= ==========
NOTE 7: PROVISION FOR INCOME TAXES
The components of income tax benefit are as follows for the six months ended
June 30, 1999 and 1998:
T
6/30/99 6/30/98
--------- -------
Current taxes payable (refundable):
Federal $ 88,600 $ -
State 27,500 -
Utilization of operating loss carryforwards (116,100) -
---------- --------
- -
---------- --------
Deferred tax expense (benefit):
Deferred compensation 5,300 126,500
Start up costs 4,000 3,400
Generation of state loss carryforwards - (124,600)
Generation of federal loss carryforwards - (168,800)
Utilization of loss carryforwards 115,900 -
All other changes (1,400) (1,100)
Increase (decrease) in valuation allowance (123,800) 164,600
---------- ----------
- -
---------- ----------
Income tax benefit $ - $ -
========== ==========
NOTE 7: PROVISION FOR INCOME TAXES - continued
The actual income tax benefit attributable to income (loss) from continuing
operations for the six months ended June 30, 1999 and 1998 differed from the
amounts computed by applying the U.S. federal tax rate of 34 percent to loss
before income tax benefit as a result of the following:
6/30/99 6/30/98
--------- ----------
Computed "expected" tax expense (benefit) $ 105,400 $ (52,000)
Timing differences related to deferred compensation (4,800) (116,100)
Timing differences related to depreciation and amortization (2,300) (1,100)
Utilization of net operating loss carryforward (97,900) -
Generation of net operating loss carryforward - 168,800
All other changes (400) 400
----------- ---------
Income tax benefit $ - $ -
========== =========
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying value of assets and liabilities for financial reporting
purposes and the amounts reported for income tax purposes. Significant
components of the Company's deferred income tax assets are as follows. There are
no significant deferred income tax liabilities.
6/30/99 6/30/98
---------- -----------
Non-current deferred tax asset:
Deferred compensation $ 72,900 $ 72,900
Start-up costs 29,100 43,400
State operating loss carryforwards 209,900 217,400
Federal operating loss carryforward 206,500 168,800
All others 7,900 7,700
---------- ---------
526,300 510,200
- -----
Valuation allowance (526,300) (510,200)
----------- ----------
Net deferred tax asset $ - $ -
=========== ==========
From May 17, 1996 (Date of Inception) through January 13, 1998, the Company was
included in the consolidated federal return of THE; therefore, loss
carryforwards for federal purposes have been utilized. Effective January 14,
1998, DSS and its subsidiaries file a consolidated federal return separate from
THE.
At June 30, 1999 the Company and its subsidiaries had operating loss
carryforwards available to reduce future state and federal taxable income. These
carryforwards are subject to examination by taxing authorities and if not
previously utilized, expire as follows:
FEDERAL STATE
2001 $ - $ (1,025,600)
2002 - (495,000)
2003 - (732,300)
2018 (664,500) (135,200)
DIVERSIFIED SENIOR SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 8: EARNINGS PER SHARE
Net income (loss) per share-basic is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Net income (loss) per share-diluted reflects the potential
dilution that could occur if options or other contracts to issue common stock
were exercised into common stock. The Treasury Stock method is used in the
calculation of the dilutive effect of the exercise of options.
The following is a reconciliation of net income (loss) per share - basic and
diluted for the six months ended June 30, 1999 and 1998:
6/30/99 6/30/98
Net income (loss) - basic and diluted $ 257,418 $ (153,058)
========= ===========
Weighted average shares outstanding - basic 3,301,400 3,192,265
Additional shares issued assuming
exercise of options 76,729 -
Shares assumed repurchased (50,308) -
---------- ----------
Weighted average shares outstanding - diluted 3,327,821 3,192,265
========== ==========
NOTE 9: SUBSEQUENT EVENTS
On July 13, 1999, the Company issued an additional 357.5 shares of 12% Series B
Cumulative Convertible Preferred Stock (the "Stock") with no par value per share
and a stated value of $2,000 per share. The Company received $673,300, which was
net of a selling commission. The Company will have other expenses, not yet
determined, that are associated with the offering. The Company will issue an
additional 367.5 shares under the same terms to the same shareholders under
certain conditions.
The Company completed the permanent financing on two 60-unit facilities on July
30, 1999. As part of the transaction those facilities were sold by Taylor House
Enterprises to a third party not-for-profit organization. The Company has a
management contract with the not-for-profit to manage the facilities for 10
years. The company agreed to provide loans to cover operating deficits at two
properties as needed during the rent-up process. To further collateralize the
commitment the Company obtained a $500,000 letter of credit from a bank.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE DISCUSSION AND ANALYSIS BELOW SHOULD BE READ IN CONJUNCTION WITH THE INTERIM
FINANCIAL STATEMENTS OF THE COMPANY AND NOTES THERETO APPEARING ELSEWHERE IN
THIS REPORT AND THE FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1998 AS FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION.
OVERVIEW
Diversified Senior Services, Inc. (the "Company") was formed in May 1996 as a
wholly owned subsidiary of Taylor House Enterprises, Limited ("THE") and began
operations in July 1996. The Company manages apartments, primarily for seniors,
develops and manages assisted living properties and develops and manages
independent living properties. All properties are targeted for the low and
moderate income residents.
In July 1996 the Company acquired Residential Properties Management, Inc.
("RPM"), a wholly owned subsidiary of THE. RPM was formed in March 1989 to
manage government subsidized multi-family and elderly residential rental
apartments. On January 14, 1998, the Company completed its initial public
offering. On February 16, 1998, the Company formed a wholly-owned subsidiary,
DSS Funding, Inc. ("DSSF"), a North Carolina corporation, for the purpose of
securing permanent financing for the properties which the Company develops or
acquires for third party owners. On July 22, 1998, the Company formed a wholly
owned subsidiary, Diversified Senior Services of Virginia, Inc. ("DSSVA"), a
Virginia corporation, for the purpose of conducting development and management
of properties in Virginia.
The Company anticipates a moderate growth in the number of apartment units
managed and also expects that income will increase due to inflationary effects
on rents. All personnel located at the apartments who manage the apartments and
perform maintenance are employees of the Company. However, the apartments
reimburse the Company for the services of the site personnel. The Company
anticipates a moderate growth in reimbursement income as a result of increases
in salaries of site personnel and an increase in the number of apartment
complexes under management.
The Company began offering home care services in August 1996 at selected
apartment locations. The Company sold the home care business effective June 1,
1999 to an independent home care provider to exercise a strategy to expand the
availability of services to its managed properties.
The Company is in the process of developing 60-unit assisted living residences
in North Carolina and 30-unit independent senior housing residences with
services throughout the Southeast. As of August 10, 1999, the Company has five
60-unit properties in the construction process, and an additional four sites
approved under North Carolina's moratorium on new assisted living facilities.
The construction process is estimated to be nine to twelve months for each
60-unit assisted living residence. The first 60- unit assisted living facility
developed by the Company commenced operations in June, 1999. The Company began
managing an assisted living property for an affiliated owner in October 1998.
The property, located in South Boston, Virginia, is licensed for up to 64
residents but currently configured for 43 residents. It was completed in April
1998. The Company will provide working capital to this facility to cover
operating deficits while the Company is pursuing permanent financing. With
respect to the 30 unit residences, the Company has two sites under construction,
two sites ready to begin construction, and an additional two sites under
control, all of which have positive feasibility. The sites are in Virginia,
South Carolina and North Carolina. Once construction of these 60-unit and
30-unit residences is completed, the Company will begin to recognize management
fee income for the properties. The pace of development and construction depends
upon the success of the Company in obtaining construction financing and
permanent financing for the properties. There can be no assurance that the
Company will consummate such financing on a regular, timely schedule, and if
alternative financing cannot be arranged on terms acceptable to the Company, the
Company may not be able to produce a pipeline of developed properties on a
regular basis as scheduled. Management believes that in the future the
development and management of assisted living facilities and residences for the
elderly will provide the vast majority of the Company's revenues and profits.
The Company is developing 30-unit and 60-unit properties for third party owners.
The Company recognizes development fee income on the percentage of completion
basis. Development costs are paid by the Company as incurred. Other development
costs are reimbursed by the purchaser when the property is sold. If a site is
abandoned, all development costs associated with that property are written off.
Most of the operating expenses of the Company are related to the personnel
directly performing the management services and the corporate management staff.
Between 70% and 90% of the expenses are for salaries, benefits and payroll
taxes. The remaining expenses are primarily administrative expenses that support
the activities of the personnel such as travel, rent, telephone and office
expenses. Since the Company's inception, the operating staff increases have been
due primarily to the entrance of the Company into the home care business.
However, the corporate staff has grown over that same period of time because of
the need to have adequate personnel in place to support the development effort.
Management expects that expenses associated with operating personnel will
continue to increase significantly as the Company expands, but management does
not expect to increase the number of corporate staff significantly during the
next several years.
DSS, RPM and DSSF are incorporated in North Carolina, and DSSVA is incorporated
in Virginia and, as C corporations, file their federal income tax returns as
part of a consolidated group. Prior to the initial public offering, DSS and RPM
filed their federal income tax returns as part of THE's consolidated group. An
income tax benefit has been recorded in 1996 and 1997 since the losses of DSS
and RPM were applied to income in THE's consolidated group. DSS, RPM and DSSF
file separate state returns since state income tax regulations do not permit
filing consolidated returns.
RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 1999 Compared to the Three and Six Months
Ended June 30, 1998
INCOME Total income increased $1,200,636 to $2,757,060 for the six months ended
June 30, 1999 from $1,556,424 for the six months ended June 30, 1998. Total
income increased $238,469 to $1,211,642 for the three months ended June 30, 1999
from $973,173 for the three months ended June 30, 1998. The increase was the net
effect of increases in development fees recognized in 1999, reimbursement income
and other income and decreases in management fees and home care fees.
MANAGEMENT FEES. Management fees decreased $28,678 to $378,601 for the six
months ended June 30, 1999 from $407,279 for the six months ended June 30, 1998.
For the three months ended June 30, 1999, management fees decreased $14,304 to
$189,443 compared to $203,747 for the three months ended June 30, 1998. On July
31, 1998 the Company sold the management rights for 361 units, primarily
multi-family, which generated management fees of approximately $10,500 per
month. The Company expects growth in fee income as the developed assisted living
and independent living properties are completed and rented.
REIMBURSEMENT INCOME. Reimbursement income increased $136,728, to $804,001 for
the six months ended June 30, 1999 from $667,273 for the six months ended June
30, 1998. Reimbursement income was $435,694 and $365,555 for the three months
ended June 30, 1999 and 1998, respectively. The increase was the result of
income received from properties for personnel hired to manage the assisted
living facility in Virginia and the two 60-unit assisted living facilities
developed by the Company that began accepting residents in June and July. The
Company expects increases in reimbursement income as the number of properties
under management increases.
DEVELOPMENT FEES. Development fees increased $969,326 to $1,286,332 for the six
months ended June 30, 1999 from $317,006 for the six months ended June 30,1998.
Development fees were $386,705 for the three months ended June 30, 1999 compared
to $317,006 for the three months ended June 30, 1998. The income is recognized
on a percentage of completion basis on the seven 60-unit assisted living
facilities and the four 30-unit independent senior housing residences currently
being developed by the Company. The Company expects development fee income to be
cyclical, depending on the availability of both construction and permanent
financing at reasonable rates.
OPERATING EXPENSES Operating expenses increased $662,792 to $2,467,116 for the
six months ended June 30, 1999 from $1,804,324 for the six months ended June 30,
1998. For the three months ended June 30, 1999 and 1998, operating expenses were
$1,096,429 and $951,492, respectively. The increase is due to personnel related
expenses and administrative expenses.
PERSONNEL EXPENSE. Personnel expense increased $287,603 to $1,690,681for the six
months ended June 30, 1999 from $1,403,078 for the six months ended June 30,
1998. Personnel expense was $873,063 for the three months ended June 30, 1999
compared to $732,897 for the three months ended June 30, 1998. Site related
personnel expense increased $136,728 for the six months due to the increase in
personnel expense at the Virginia facility and the two new 60-unit facilities,
as mentioned above. Personnel expenses also increased due to the increased
development activity. The Company expects increases in personnel expense in
future periods depending upon increases in management and development activity.
ADMINISTRATION AND OTHER EXPENSES. Administration and other expenses increased
$369,477 to $736,712 for the six months ended June 30, 1999 from $367,235 for
the six months ended June 30, 1998. For the three months ended June 30, 1999 and
1998, administration and other expenses were $203,400 and $200,467,
respectively. The increase reflects increases in the assisted living and
independent senior housing development activity, and expenses related to
operating the public company. The Company expects further increases in
administrative expenses as the number of assisted living and independent senior
housing properties managed increases for support of direct management of the
properties, but only minor increases attributable to corporate management of the
Company.
OTHER INCOME AND EXPENSES. The Company earned $28,227 and $100,520 in interest
income from the investment of cash and cash equivalents during the six months
ended June 30, 1999 and 1998, respectively, and had an unrealized loss of
$38,721 on funds held for development at June 30, 1999. The decrease is due to
the decreased amount of funds held for development at June 30, 1999 compared to
June 30, 1998. The Company expects interest income from two sources in future
periods. As the result of the issuance of preferred stock, the company will have
additional funds held for development that will be invested in liquid
investments. Second, the Company will begin recognizing a return on funds loaned
to the owners of properties currently being developed. Interest expense of
$5,678 was incurred in the six months ended June 30, 1998 on a bank loan, which
was paid off with proceeds from the equity offering completed in January 1998.
NET INCOME (LOSS). The net income increased $467,681 to $314,623 for the six
months ended June 30, 1999 from a net loss of $153,058 for the six months ended
June 30, 1998. The increase was due to the increase in operating income. For
the three months ended June 30, 1999 and 1998, net income was $111,665 and
$90,855, respectively.
PREFERRED STOCK DIVIDENDS. On May 3, 1999, the Company issued 1,500 shares of
12% Series B Cumulative Convertible Preferred Stock with no par value per share
and a stated value of $2,000 per share. The Stock pays a 12% dividend
semiannually and has a liquidation preference superior to all stock, common or
preferred, currently issued and outstanding. Preferred stock dividends were
$57,205 for the six months ended June 30, 1999.
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS. The net income (loss)
available to common shareholders increased $410,476 ($.13 per share) to $257,418
($.08) per share for the six months ended June 30, 1999 from a net loss of
$153,058 ($.05 loss per share) for the six months ended June 30, 1998. The
increase was due to the net effect of an increase in operating income offset by
the preferred stock dividends. For the three months ended June 30, 1999 and
1998, net income available for common shareholders was $54,460 ($0.02) per
share) and $90,855 ($.03 per share), respectively. The Company expects to break
even until properties currently being developed are completed and reach
stabilized occupancy.
FINANCIAL CONDITION
JUNE 30, 1999 COMPARED TO DECEMBER 31, 1998
The Company had current assets of $807,521 on June 30, 1999 and $1,056,003 on
December 31, 1998. The primary current asset on December 31, 1998 was
investments held for development of $819,074. On June 30, 1999 the balance was
$125,731, due to the Company's increased development activity. Prepaid expenses
and other increased from $90,858 to $196,803 due primarily to the payment of
certain operating expenses in the first six months that will be charged during
the current year.
Development costs decreased to $420,950 at June 30, 1999 from $730,604 at
December 31, 1998. During the initial stages of development, certain development
costs are capitalized. When development fee income is recognized on a certain
property, that property's associated costs become receivable from either THE, on
a temporary basis, or from the permanent owner. Development costs will either be
recouped with the successful completion of a property or written off if a site
is abandoned.
Development fees and costs due from properties currently held by THE increased
to $6,376,338 at June 30, 1999 from $2,603,656 at December 31, 1998. The
increase is due to development fees and reimbursable costs on properties
currently being developed that are due to the Company.
Accounts receivable-affiliates increased to $504,254 at June 30, 1999 from
$489,669 at December 31, 1998. The increase is due to advances made to an
affiliate for operations at the Virginia facility.
Total liabilities increased $309,671 to $741,213 at June 30, 1999 from $431,542
at December 31, 1998 due primarily to payments of commitments to affiliates with
properties under construction.
Shareholder's equity increased to $7,471,994 at June 30, 1999 from $4,581,826 at
December 31, 1998. The increase was the net effect of the proceeds of $2,687,532
from the issuance of preferred stock, a decrease in unrealized gains on
investment securities of $54,782 and the decrease in accumulated deficit due to
the net income of $257,418.
LIQUIDITY AND CAPITAL RESOURCES
The Company has operated, and expects to continue to operate, on a negative cash
flow basis due to start-up expenses and length of the development cycle.
Currently, the Company's primary cash requirements include covering operating
deficits and development expenses related to the development, construction and
fill-up of 60 unit assisted living residences and 30 unit independent senior
housing residences with services.
The net proceeds of the initial public offering were used to pay off the
outstanding balance under the bank line of credit, to provide $3.5 million in
development working capital for the assisted living and independent living
projects and for general corporate purposes. The proceeds from the initial
public offering designated for development were fully invested in assisted
living and in dependent living properties by the end of the first quarter of
1999. The proceeds from the issuance of preferred stock during the second, third
and fourth quarters will provide additional development working capital. The
company anticipates that the proceeds from the issuance of preferred stock, the
collection of development fees and costs receivable, together with construction
funds available for each facility, will be sufficient to complete the current
development pipeline. Future development will require additional debt or equity
financing. The Company currently has several sources of potential funding and
does not anticipate that liquidity demands will not be met. There can be no
assurance that the Company will be able to obtain financing on a favorable or
timely basis. The type, timing and terms of financing selected by the Company
will depend on its cash needs, the availability of other financing sources and
the prevailing conditions in the financial markets.
The Company is the guarantor on the construction loans for the properties
currently under construction owned by THE.
INFLATION AND INTEREST RATES
Inflation has minimal impact on the daily operations of the Company. Increases
in salaries and administrative expenses are offset by increases in management
fees that are computed as a percentage of rent and resident service fees.
Increases in resident service fees may lag behind inflation since the amount of
the fee is based on a cost reimbursement by public sources. Except for the lag
time, however, the Company expects the reimbursement to keep pace with
inflation.
The primary concern regarding inflation is interest rate fluctuations. High
interest rates would increase the cost of building new facilities and could slow
down the Company's development plans.
YEAR 2000
Many currently installed computer systems and software are coded to accept only
two digit entries in the date code filed. Beginning the year 2000, these date
code fields will need to accept four digit entries to distinguish twenty-first
century dates from twentieth century dates. As a result, within the next
eighteen months, computer systems and/or software used by many companies may
need to be upgraded to comply with such "Year 2000" requirements.
The Company has developed plans to modify its computer information systems
enabling proper processing of data relating to the year 2000 and beyond. The
Company has been informed by Electronic Data System ("EDS"), the paying agent
for the North Carolina Medicaid program, that the National Electronic Claims
Submission ("NECS") software developed by EDS for electronic claims submission
by North Carolina Medicaid providers, is not currently Year 2000 compliant.
Compliance is anticipated by September 1999. Medicaid revenues do not currently
constitute a material portion of the Company's revenues; but as additional
assisted living residences are added to the Company's management portfolio, the
Medicaid revenues will increase. All other computer programs currently in use by
the Company have been upgraded to be Year 2000 compliant.
While there can be no assurance that Year 2000 matters will be satisfactorily
identified and resolved, the Company currently believes that Year 2000 issues
will not have a material adverse effect on the Company. The possibility exists
that isolated incidents of a Year 2000 nature could affect individual properties
managed by the Company, but the Company does not anticipate that such
incident(s) would have a material impact on the Company's business or
operations. The Company is in the process of contacting customers, vendors and
service providers to determine which of them is affected by the year 2000
problem, and to what extent, in order to assess the potential impact on the
Company.
CERTAIN ACCOUNTING CONSIDERATIONS
SFAS NO. 123
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 123 establishes financial accounting
and reporting standards for stock-based employee compensation plans. Those plans
include all arrangements by which employees receive shares of stock or other
equity instruments of the employer or the employer incurs liabilities to
employees in amounts based on the price of the employer's stock. Examples are
stock purchase plans, stock options, restricted stock awards, and stock
appreciation rights. This statement also applies to transactions in which an
entity issues its equity instruments to acquire goods or services from
non-employees. Those transactions must be accounted for, or at least disclosed
in the case of stock options, based on the fair value of the consideration
received or the fair value of the equity instruments issued, whichever is more
reliably measurable. The accounting requirements of SFAS No. 123 are effective
for financial statements for fiscal years beginning after December 15, 1995, or
for an earlier fiscal year for which SFAS No. 123 is initially adopted for
recognizing compensation cost. The statement permits a company to choose either
a new fair value-based method or the current APB Opinion No. 25 intrinsic
value-based method of accounting for its stock-based compensation arrangements.
The Company adopted its Stock Incentive Plan effective January 1, 1997. During
1998, the Company granted 47,000 stock options at an exercise price ranging from
$4.75 to $5.225, the market value of the shares at the date of grant. The stock
options are 100% vested and have a five-year term. Warrants for 45,000 shares
were issued with a four-year term, a one-year vesting schedule and exercise
prices ranging from $6.00 to $9.00 per share. Warrants for 50,000 shares have a
four-year term, one year vesting schedule and an exercise price of $6.75 per
share. At December 31, 1998, a total of 142,000 stock options and warrants are
outstanding, 1,400 common shares have been issued and 356,600 shares are
available for granting.
INFORMATION CONCERNING FORWARD LOOKING STATEMENTS
With the exception of historical information (information relating to the
Company's financial condition and results of operations at historical dates or
for historical periods), the matters discussed herein contain "forward-looking
statements" within the meaning of the Private Securities Litigation Act of 1995.
Forward-looking statements include, without limitation, any statement that may
predict, forecast, indicate or imply future results, performance or
achievements, and may contain the words "believe," "anticipate," "expect,"
"estimate," "intend," "project," "will be," "will likely continue," "will
result," or words or phrases of similar meaning. Forward-looking statements
involve risks and uncertainties which may cause actual results to differ
materially from the forward-looking statements. These forward-looking statements
are based on management's expectations as of the date hereof, and the Company
does not undertake any responsibility to update any of these statements in the
future.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Sales of Unregistered Securities.
As of May 3, 1999, the Company entered into a Securities Purchase Agreement (the
"Purchase Agreement") with certain investors contemplating a potential funding
of up to $4.450 million (the "Funding"). The Funding provides for the private
placement by the Company of up to 2,225 shares of 12% Series B Cumulative
Convertible Preferred Stock (the "Series B Preferred Stock") convertible into
shares of the Company's Common Stock, no par value (the "Common Stock").
Pursuant to the Purchase Agreement, the Company shall issue and sell to the
investors the Series B Preferred Stock in three tranches in the following
amounts: (i) $3,000,000 of the stated value of the Series B Preferred Stock in
the first tranche; (ii) $715,000 of the stated value of the Series B Preferred
Stock in the second tranche; and (iii) $735,000 of the stated value of the
Series B Preferred Stock in the third tranche. The first tranche was funded at
the signing of the Purchase Agreement; the second tranche will be funded within
10 days of the Company filing a resale registration statement with the
Securities and Exchange Commission with respect to the Series B Preferred Stock
and the underlying Common Stock; and the third tranche will be funded within 10
days of such resale registration statement being declared effective by the
Securities and Exchange Commission. Taylor House Enterprises, Ltd. ("THE"), the
Company's parent, participated as an investor in the Funding, purchasing $60,000
of Series B Preferred Stock in the first tranche and committing to purchase
$20,000 of Series B Preferred Stock in each of the next two tranches.
Holders of Series B Preferred Stock are entitled to receive, in preference to
the holders of Common Stock or any other securities which are junior to the
Series B Preferred Stock, cumulative dividends at an annual rate of 12% and
shall be paid semi-annually in arrears on the first business day of January and
July in each year (each, a "Dividend Date"), commencing on July 1, 1999.
Dividends will be payable to holders of record as they appear on the stock books
of the Company on the record date, which will be the December 15 or June 15, as
the case may be, before the related Dividend Date.
The Series B Preferred Stock is convertible into shares of the Company's Common
Stock at $4.00 per share until January 29, 2000 and, after such date, at the
lower of $4.00 per share or the lowest bid price of the Common Stock during the
30 trading days preceding the date of conversion. However, each of the investors
has agreed that in no event shall it be permitted to convert any shares of
Series B Preferred Stock in excess of the number of such shares upon the
conversion of which, the sum of (i) the number of shares of Common Stock owned
by such investor plus (ii) the number of shares of Common Stock issuable upon
conversion of such shares of Series B Preferred Stock, would be equal to or
exceed 9.999 percent of the number of shares of Common Stock then issued and
outstanding, including the shares that would be issuable upon conversion of the
Series B Preferred Stock held by such investor. The Purchase Agreement prohibits
the investors and their affiliates from engaging in shorting transactions in the
Common Stock at any time the Common Stock is trading below $8.00 per share.
The Company shall have the right to redeem the outstanding Series B Preferred
Stock, in whole or in part, at any time and from time to time, from and after
the first day on which the price of the Company's Common Stock exceeds $8.00 by
paying to the holders of the Series B Preferred Stock 100% of its stated value,
together with all accrued and unpaid dividends thereon through the date of
redemption.
Until such time as all of the Series B Preferred Stock has been converted into
Common Stock, or has been redeemed, the Company shall not, without the written
consent of 75% of the holders of interest of the then outstanding shares of
Series B Preferred Stock, incur any indebtedness except for: (i) indebtedness
existing as of the closing of the first tranche, (ii) indebtedness (including
guarantees thereof) secured by real property (including leasehold interests)
incurred by the Company in connection with the development of, or purchase of,
such real property, provided that such indebtedness does not exceed 80% of the
fair market value of the property interest securing such indebtedness at the
time such indebtedness is put in place or (iii) any guarantees of lines of
credit used specifically to finance the working capital of affiliates which
develop senior housing or assisted living facilities; provided, however, that
prior to such time as all of the shares of Series B Preferred Stock are
converted into shares of Common Stock, the aggregate amount of the guarantees
referenced in sub-clause (iii) outstanding at any one time shall not exceed
$3,000,000. Furthermore, until such time as all the Series B Preferred Stock has
been converted into Common Stock, or have been redeemed, the Company must
maintain a tangible net worth (determined in accordance with United States
generally accepted accounting principals applied on a consistent basis) of at
least $4,000,000.
Each purchaser of the Series B Preferred Stock has the right to cause the
Company to redeem a portion of such purchaser's shares of Series B Preferred
Stock, at any time and from time to time, after May 3, 2002 at 100% of the
stated value of such shares, together with all accrued and unpaid dividends
thereon through the date of redemption plus a Put Premium (as defined below).
The maximum number of shares of Series B Preferred Stock, expressed as a
percentage of the total number of shares of Series B Preferred Stock issued,
that may be so redeemed during certain defined periods is set forth in the table
below. The "Put Premium" shall be an additional payment by the Company to the
holder of the Series B Preferred Stock being redeemed in an amount such that
when added to the total dividends paid to such holder through the date of
redemption will yield an annual percentage rate of return ("Total Return") to
such holder set forth below opposite the period in which such redemption occurs.
The additional amount represented by the Put Premium may, at the option of the
holder of the Series B Preferred Stock, be paid in cash or in shares of
registered Common Stock.
Redemption Maximum Percentage
Date of Shares Redeemed Total Return
May 3, 2002 -
May 4, 2003 33% 18%
May 3, 2003 -
May 4, 2004 66% 19%
May 3, 2004 and thereafter 100% 20%
If by October 30, 1999, the closing bid price for the Common Stock, on at least
five trading days, is not at least $14.00 per share, then on November 4, 1999,
THE shall transfer, out of its holdings of the Company's Common Stock, shares of
unregistered Common Stock to the Company in the following amounts, and, on
November 9, 1999, the Company shall deliver such shares of unregistered Common
Stock to the purchasers of the Series B Preferred Stock, other than THE. The
aggregate amounts of the Company's Common Stock that THE would dispose of from
its holdings pursuant to this arrangement would range from 245,000 shares to
362,500 shares. If this provision becomes effective, the Company will not be
issuing any new shares of its Common Stock.
The offers and sales to the purchasers of the Series B Preferred Stock were made
pursuant to a claim of exemption under Section 4(2) of the Securities Act, as
amended (the "Securities Act"). The Company did not use any general
advertisement or solicitation in connection with the offer or sale of the Series
B Preferred Stock to the investors. Each of the investors represented and
warranted, among other things, that he or it was purchasing the Series B
Preferred Stock for investment purposes and not with a view to distribution and
that he or it was an "accredited investor" (as defined in Regulation D
promulgated by the SEC). Appropriate legends were affixed to the certificates.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual meeting of Stockholders of the Company was held on May 13, 1999. The
following matters were voted on at the annual Meeting:
1) Election of Directors. The following persons were elected as directors:
Number of Shares
---------------------------------
Voted Against
Voted for or Withheld
---------- ------------
Susan L. Christiansen 3,266,854 1,700
Walter H. Ettinger, Jr. 3,266,354 2,200
Of the remaining three board members, one board member will stand for
election in 2000, and two will stand for election in 2001.
2) APPOINTMENT OF INDEPENDENT AUDITORS. The stockholders ratified the
appointment of The Daniel Professional Group, Inc. as independent
auditors for the Company for the year 1999. There were 3,264,754 shares
voted for approval; 0 shares voted against, 3,800 abstentions, and
32,846 shares not voting.
3) ISSUANCE OF SERIES B CONVERTIBLE PREFERRED STOCK, THE ISSUANCE OF
ADDITIONAL SHARES OF COMMON STOCK, AND THE ISSUANCE OF THE UNDERLYING
SHARES OF COMMON STOCK UPON CONVERSION. The stockholders approved the
issuance of Series B Convertible Preferred Stock, the issuance of the
additional shares of common stock, and the issuance of the underlying
shares of common stock upon conversion of the Series B Convertible
Preferred Stock. There were 2,099,796 shares voted for approval; 88,200
shares voted against, 0 abstentions and 1,113,404 shares not voting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Securities Purchase Agreement dated as of May 3, 1999 among the
Company and certain investors. Incorporated by reference to Exhibit
10.1 to Quarterly Report on Form 10-QSB for the quarterly period ended
March 31, 1999 (File No. 000-23321).
10.2 Registration Rights Agreement dated as of May 3, 1999 among the
Company and certain investors. * Incorporated by reference to
Exhibit 10.2 to Quarterly Report on Form 10-QSB for the quarterly
period ended March 31, 1999 (File No. 000-23321).
27 Financial Data Schedule.*
(b) Reports on Form 8-K
None.
- ------------------------
* Filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DIVERSIFIED SENIOR SERVICES, INC.
REGISTRANT
By: /S/ G. L. CLARK, JR.
---------------------
Date: August 13, 1999 G. L. Clark, Jr.
Executive Vice President and
Chief Financial Officer